Moody's downgrades Bermuda (Update)

Thursday is his 65th birthday and Moody’s Investors Service downgraded Bermuda’s government bond rating to Aa3 from Aa2 and placed a negative outlook on the rating.

The downgrade was prompted by the steep rise in government debt and the lack of an economic recovery from the downturn at the time of the crisis.

In addition, Moody’s also downgraded other ratings as well.

The foreign currency bond ceiling was moved to Aa2 from Aaa and the foreign currency bank deposit ceiling was downgraded to Aa3 from Aa2. Furthermore, the local currency bond and deposit ceilings were moved down to Aa2 from Aaa and Aa1, respectively. These actions do not affect the Prime-1 country ceilings for Bermuda. The rating action concludes the review for possible downgrade that was initiated on April 3.

Government debt has risen from 5.9 per cent of GDP at the end of the 2007-08 fiscal year to an estimated 28.1 per cent at the end of 2012-13. The newly elected OBA’s first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to over 30 per cent.

Moody’s says that the rise in government deficits and debt was primarily due to a prolonged period of declining GDP, which began in 2009 and looks likely to continue through 2013. Moderate growth may resume in 2014, but the long-term decline in the tourism industry and less dynamic growth in the insurance sector could limit the pace of future growth.

Despite these negative trends in government debt and the economy, Moody’s says that the Aa3 rating is supported by the island's very high per capita income, its strong institutions, and its still moderate level of government debt in relation to similarly rated sovereigns. At over $80,000, per capita income is among the highest in the world.

The country's regulatory institutions have facilitated the development of an important international business sector, especially insurance and reinsurance. Finally, the current level of government debt is close to the 29.4 per cent median for sovereigns in the Aa3-A2 rating range in which Bermuda falls under Moody's Sovereign Bond Ratings methodology.

The negative outlook on the Aa3 rating reflects uncertainty over the government debt trajectory over the medium term. Moody's expects the government to address the rise in the debt with further policy actions in the coming year.

However, the poor performance of the economy means that their ability to do so remains constrained. If the economy begins to record positive growth and the government is able to contain the rising debt trend, the rating outlook could return to stable.

However, a continuation of the economic downturn and a lack of significant fiscal policy measures could prompt a further downgrade of the rating.

The Ministry of Finance responded to the rating action saying it recognized continuing government deficits and weak economic growth could put Bermuda’s sovereign rating at risk of a downgrade by one notch.

A spokesperson said: “We note however, that in so doing, Moody’s affirmed that our rating is supported by very high per capita income, strong institutions, and our still moderate level of government debt in relation to similarly rated sovereigns.

“While the ratings adjustment was not positive, the Ministry of Finance also noted that the adjusted rating remains in the top tier of the ratings matrix. At Aa3, our sovereign bond rating is only three notches below the highest rating of Aaa.

“Moody’s continues to endorse the island’s institutional strength and the island’s very high per capita income. Government remains optimistic about future prospects for growth and will continue to press ahead with our Jobs and Economic Turnaround Plan which involves providing balance between responsible economic growth and disciplined financial management.”

Statement by Shadow Finance Minister David Burt

Today’s downgrade and negative outlook by Moodys Investors Service should serve as a wake up call to the OBA. Moody's reiterated what they said last month by saying, "the newly elected government's first budget, introduced in February, projects a large deficit that will raise this ratio further in the coming year to well over 30%."

Despite the local media praise for the OBA Budget, the PLP and independent international observers are concerned with the increase in spending and the record deficit contained in the first OBA Budget. This spending increase followed 2 consecutive years of disciplined spending reductions under the PLP.

Moody’s new negative outlook is a vote of no confidence in the new OBA government and is a likely result of the OBA’s lack of a credible plan of action to address Bermuda’s deficit. We again point the OBA to the ideas raised in the PLP’s Throne Speech Reply and Budget Reply; These ideas will assist Bermuda in diversifying the economy and increasing our revenue base. Bermuda requires action; not committees, soundbites and photo-ops.

Tomorrow, the House of Assembly is back in session. I expect that the Minister of Finance will address this downgrade, address this negative outlook, and tell the people’s representatives exactly what he plans to do to reverse this trend.